Here’s the full transcript of our interview with Ólafur Ragnar Grímsson, who has been President of Iceland since 1996, and announced last month he would be running for a fifth term. Keep reading to hear his thoughts on Iceland’s recovery, and how a large financial sector can ruin a nation.

Is Iceland – the wonderful island with just 300 thousand citizens – going to be the first country seriously questioning the privatized money creation and considering Full Reserve Banking proposals? It seems that it might well be the case…

A motion has recently been put forward in the Althing – the Icelandic Parliament – calling for the forming of a committee to report on the benefits/costs of full reserves banking. The motion reads:

“Althing concludes that the minister of finance will form a committee of specialists to research how the separation of money creation and loan function of the banking system can be achieved by limiting banks’ ability to create new deposits through lending.”

Deadlines for submission was December 4th.

Ben Dyson made a submission on behalf of Positive Money to the Icelandic parliament in favour of the establishment of a committee to assess the need for reform. It reads:

Proposal No. 262 proposes the establishment of a committee to consider how in the current banking system the function of money creation can be separated from the function of lending.

Such a separation would end the situation where most of Iceland’s money supply is created and allocated by the same private banks that were implicated in the financial crisis.

We feel that it would be a serious oversight to ignore this issue in light of one of the worst financial crises in history, particularly given its effect on Iceland at the time of the crisis. However, the issue is not simply one of preventing future financial crises. The current system of privatized money creation also has impacts for debt, poverty, inequality, the business environment, and economic growth. Reforming money creation would havesignificant economic and social advantages.

Positive Money has also offered to provide to any established Committee highly-detailed step-by-step reform proposals, an assessment of risks etc. to show that alternatives are feasible.

There were 12 submissions made, 9 of them positive letters (in English), 1 submission was slightly negative and 2 rather negative (from The Central Bank and the Icelandic Financial Services Association, which considered it ‘pointless’ to investigate the issue further (surprise surprise).

Althing concludes that the minister of finance will form a committee of specialists to research how the separation of money creation and loan function of the banking system can be achieved by removing banks’ ability to create new deposits through lending. The committee shall complete its work by January 1st 2013 and the minister deliver a report to Althingi about the conclusions of the committee no later than one month after the committee completes its work.

Report

It is the opinion of the person introducing the proposal that adequate steps have not been taken to prevent another banking crisis in Iceland. It is important to take action to promote financial stability, in order to prevent further financial catastrophe such as the banking crisis in 2008.

The current monetary system’s deposit may create the equivalent of money by lending of excess deposits. In fact, most of the money used in general transactions are electronic deposits which private banks have created with excess deposits. Money creation and bank lending must be separated by changing laws and only allow the Icelandic Central Bank to create money, whether the money is made of paper, metal or electronic form.

With this amendment net interest income (interest income on loans in excess of interest expenditure on deposits) will be transferred by a large extent to the Central Bank, but banks have until now profitted received this profit. The separation will give the Central Bank more control over the money supply and prevent banks from creating asset bubbles with their lending activity.

It is important to see the pros and cons of such an arrangement in this country to prevent another crisis. Recent research of specialists working with the International Monetary Fund confirms that such separation delivers the benefits which Irving Fisher (1936) stated that they would do, ie to:

improve control of the main causes of business cycles which is a sudden increase and decrease in lending and the supply of money that banks create,

prevent bank runs,

reduce public debt and reduce the indebtedness of individuals, where money creation would no longer need to be based upon borrowings.

If those statements are true it is the assessment of the person introducing the proposal that this is a opportunity for authorities to create great benefits for people with low cost. Therefore, it is important to take action soon and a committee of experts will be formed that review the IMF report, apply the assumptions implied on Icelandic society and assess whether such a path is possible, how best would be to implement this plan and any amendments are necessary in this purpose.

It is proposed that the committee delivers its findings no later than the first January 2013 and the Minister returns a report on the findings no later than one month after the committee finishes its work.

US finance firms poured almost half a billion dollars last year into lobbying the US government. The goal: Soften the blow of new financial rules. DW has learned that two German firms are among the big spenders.

Austria is facing a capital injection of as much as 1 billion euros ($1.3 billion) into KA Finanz AG less than two weeks after bailing out Oesterreichische Volksbanken AG. (VBPS)

The International Swaps & Derivatives Association yesterday ruled that Greece’s use of collective action clauses forcing investors to take losses under the nation’s debt restructuring will trigger default insurance payouts.

In a statement before ISDA’s decision, KA Finanz said it may have risk provisions of about 1 billion euros if credit- default swaps on Greece it has written are activated. That includes charges of 423.6 million euros on an assumed loss quota of 80 percent, it said.

KA Finanz is the so-called bad bank of Kommunalkredit Austria AG, which was nationalized in 2008 when it was owned by Volksbanken and Dexia SA. While Kommunalkredit continues as a municipal lender and has to be sold again by Austria by mid-2013, KA Finanz took on securities, loans and CDS that are not part of that main business and is winding down those assets.

Austria has promised to keep KA Finanz’s capital ratio at 7 percent and Finance Ministry Maria Fekter said on March 3 that the country may have to inject as much as 1 billion euros into KA Finanz to keep that pledge.

The Alpine republic also has nationalized Hypo Alpe-Adria- Bank International AG and on Feb. 27 announced that it would take a stake of as much as 49 percent in Volksbanken after injecting 250 million euros into the lender and writing off 700 million euros of previous sate aid. Austria is boosting its banking tax to finance the Volksbanken bailout. It has yet to say how it may finance KA Finanz.

To contact the reporters on this story: Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net; Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editors responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net

The first letter in the Financial Times on Tuesday 3rd January 2012 was about the creation of money by private banks:

“Sir, In your editorial “Restoring faith in the banking system” (December 29), you rightly draw attention to the useful role played by banks in carrying out their “core activities” of “the payment systems and deposit-taking”. However, you make no mention of their other activity, namely the creation of new money in the form of commercial bank money.

“Many people would consider this to be far the most important activity of banks in the current banking system, accounting as it does for the creation of more than 97 per cent of the money in circulation (M4).

“If banks did not enjoy this extraordinary privilege it is doubtful whether they would have at their disposal the quantity of profits that makes the current bonus system possible.

Trial begins of Geir Haarde, the first politician in the world to face charges over 2008 financial crisis

guardian.co.uk, Monday 5 March 2012 18.30 GMT

The former prime minister of Iceland has become the first politician in the world to stand trial over the 2008 financial crisis.

Geir Haarde, who was ousted after Iceland’s three biggest banks collapsed and the country’s economy went into meltdown, could be jailed for two years if found guilty of gross negligence in failing to prepare for the impending disaster. He denied the charges and claimed that “only in hindsight is it evident that not everything was as it should have been”.

Haarde was instrumental in transforming Iceland from a fishing and whaling backwater into an international financial powerhouse before the credit crunch caused the economy to crash almost overnight.

The Icelandic parliament’s “truth report” into the causes of the crisis that forced the country to borrow $10bn (£6.3bn) to prop up its economy, accused him of “gross negligence”. He is also accused of failing to rein in the country’s fast-growing banks, whose paper value before the crash had ballooned to 10 times the gross domestic product of the island state of 320,000 people. And he is alleged to have withheld information that indicated the state was headed for financial disaster.

The country’s three biggest banks – Glitnir, Kaupthing and Landsbanki – went bust within weeks of each other after the collapse of Lehman Brothers in the US sparked the credit crunch in 2008.

“None of us realised at the time that there was something fishy within the banking system itself, as now appears to have been the case,” Haarde told the court in the capital of Reykjavik on Monday. “I think it’s illogical to think that I or anyone else in the government could have reduced the size of the banks to a greater extent than was done at the time.”

He is accused of failing to prevent the contagion from spreading to the UK by not insisting that Icelandic banks ringfence their overseas operations. The crisis sparked a diplomatic row with the UK as the demise of Landsbanki brought down its British internet banking arm, Icesave, leaving British councils, universities and hospitals more than £1bn out of pocket.

Gordon Brown, who was British prime minister at the time of the collapse, accused Haarde of “unacceptable” and illegal” behaviour over its failure to guarantee to reimburse UK customers of the bank. The British government stepped in to protect most savers, at a cost of £3.2bn but it is continuing to demand compensation from Iceland to cover the cost.

The crisis also led to the demise of Baugur, the British retail investor which owned stakes in House of Fraser, Debenhams and Woolworths.

Haarde, who led the right-leaning Independence party and was prime minister from 2006 to 2009, rejected all the charges as “political persecution” from the country’s left-leaning government, and said he would be vindicated by the trial. He said Icelanders’ interests were his “guiding light” and insisted that his conscience was clear.

The trial is expected to last until mid-March, with the court taking another four to six weeks to deliver its verdict.

Haarde has become the first person to ever stand trial at the country’s Landsdómur criminal court, which was created in 1905 to hear charges brought against ministers. He was one of four former Icelandic ministers blamed by the “truth report” for causing the crisis, but parliament voted last year that he should be the only person to stand trial.

The others named in the report were the former finance minister Árni Mathiesen and former minister of commerce Björgvin Sigurdsson, and Davíd Oddsson, a former prime minister who was running the country’s central bank at the time.

REYKJAVIK, Iceland — Iceland’s former prime minister has rejected charges he failed to adequately protect his country’s economy from financial shocks in the first criminal trial of a world leader over the 2008 financial crisis.

“I reject all accusations, and believe there is no basis for them,” Geir Haarde said as he took the stand on Monday. He said it was the first chance he had to answer questions in the case.

Haarde became a symbol of the bubble economy for Icelanders who lost their jobs and homes after the country’s main commercial banks collapsed in 2008, sending its currency into a nosedive and inflation soaring.

Prosecutors opened the case at the Landsdomur, a special court being convened for the first time in Iceland’s history.

Part of their case hinges on a charge that Haarde failed to implement recommendations a government committee had drawn up in 2006 to strengthen Iceland’s economy.

Haarde told the court that the committee’s work could not have prevented Iceland’s economic crash.

“Nobody predicted that there would be a financial collapse in Iceland” in 2008, he said, adding that the government did not fully understand how much debt the country’s banks had on their books.

Haarde is accused of negligence for failing to prevent the financial implosion from which the small island country is still struggling to recover.

In the crisis’ immediate aftermath – as unemployment and inflation skyrocketed – many sought to affix blame for the havoc across the 330,000-strong nation. A wave of public protests forced Haarde out of government in 2009.

Haarde has pleaded not guilty and sought to have all charges dismissed, calling the proceedings “preposterous.”

He has insisted Icelanders’ interests were his “guiding light,” and blamed the banks for the crisis, saying government officials and regulatory authorities tried their best to prevent the crisis and that his “conscience is clear.”

The trial is expected to last until mid-March, with the court taking another four to six weeks to deliver its verdict.

Today has opened with news from the Far East and in particular from China where the 11th National People’s Congress has opened. The mainstream media seems to have fixated itself on the speech by Prime Minister Wen Jiabao who set an economic growth target of 7.5% in China in 2012 as well as consumer price inflation target of 4%. However anybody who follows China’s economy will have already been aware that a reduction in growth was on the cards. Indeed back on the 12th of December I suggested that she should ease monetary policy in response to this.

So if we look at the world right now we see that there is a danger of an economic slowdown in 2012 and that inflationary pressure has abated somewhat. This gives an opportunity for a policy response in India and further responses in China (she cut bank reserve requirement on November 30th). They should take it.

I still believe this to be the position although I did also give a warning which has also turned out to be a factor.

The danger on the inflation side would be further trouble in the Middle East as it is plain there are many problems in Syria and the recent explosions at military bases in Iran are worrying. So the risk is further rises in the oil price.

Regular readers will recall that when the Chairman of the Federal Reserve Ben Bernanke gave the opinion that he was “100% sure” that he could deal with any inflation resulting from his expansionary policies I question this. Furthermore I question whether we can ever be 100% sure of anything! In my opinion China is in a sub-section of this where policymakers should be making a high percentage play realising that there are risks. the main issue is what her Prime Minister described thus.

China’s economy is encountering new problems

The danger to this is oil based inflationary pressure. However the Chinese position is different to that of the UK in that policy has been designed to be contractionary with the increases in interest-rates and bank reserve requirements that took place and it is time to unwind some of those in my opinion and probably past time. Such moves take 18-24 months to fully impact so one has to look a long way ahead.

What is the latest data on China’s economy?

The HSBC Purchasing Managers Index

Here we see a recovery after the impact of the Chinese New Year in January.

February data signalled renewed growth of business activity across the combined manufacturing and service sector, with the HSBC Composite Output Index up from 49.7 to 51.8.

So we have a return to growth which is good (on this index a number >50 indicates expansion). However if we look back at the trend for this series we see the following pattern. There was an extraordinary surge in 2009 after the 2008 dip and the number pushed close to 60 but since then there has been a clear downward trend if we allow for some individual ebbs and flows. Also the recovery from the New Year celebratory period is weaker than usual this year. The position is best summed up by this from the report I think.

The latest service sector findings signalled that new business wins did little to alter the trend in outstanding business levels, which remained broadly stable over the month.A similar tendency was seen in manufacturing and, as a result, at the composite level.

Prices?

There are plainly dangers here should the oil price remain at current elevated levels (just below US $124 for a barrel of Brent crude oil). But as we stand we see this.

Despite higher average costs, service sector companies left their output charges broadly unchanged compared to one month earlier.

One interesting change, China’s stock market

One definite change in 2012 has been the performance of China’s stock market. If we look at the Shanghai Composite Index we saw falls of just over 14% in 2010 and just under 13% in 2011. This year so far we have seen a rise of just under 11%. On its own this looks like a reversal of trend, however followers of the concept of #carboncopy2012 may already be mulling that we saw this at the opening of 2011 too.

Japan

Whilst looking at the Far East there is the issue of new data for Japan which has emerged overnight. We saw a purchasing managers report for her too and here is the result.

Consequently, the Composite Output Index posted 51.2 in February, broadly unchanged on January’s reading of 51.1, to again signal a modest rise in private sector activity.

So growth but slow growth for Japan. Here we see two opposite issues. This index plunged to 35 after the Tsunami that hit Japan just under a year ago and whilst there has been a recovery it has been weak and uninspiring.

On the other side of the coin and potentially hopeful for Japan we have seen a burst of Yen weakness in recent days which has seen it fall to above 81 versus the US dollar and to over 107 versus the Euro. It has weakened this morning because Japan’s exporters have been reported as hedging their positions but there are grounds for wondering if this move will give Japan and her exporters a much needed boost.

However not every currency can fall!

Here we move to a problem which has echoes of the competitive devaluations of the 1920s and 1930s. The recent weakening of the Yen adds to this as we now have one less strong currency. If we look at China we see that her government is now talking of a “stable Yuan (renminbi)” after the rise it has permitted. Since the summer of 2010 the Yuan has risen from 6.83 versus the US dollar to 6.307 now.

So here is today’s question whose currencies are going to appreciate in future? In a game which has a zero sum we plainly have a problem going forwards. Last week a comment on this blog mentioned that Brazil was again declaring a “currency war” to which my only additon would be that they had done that some time ago! This new phase has seen her introduce new currency controls. Well in a case of are you thinking what I am thinking take a look at this.

A group of economists in the Pacific region have issued a statement which has the following two key sentences.

While capital controls and other capital management techniques are no panacea for financial instability, there is an emerging consensus that they are an important part of the macro-economic toolkit………….Thus, we recommend that the TPPA permit governments to deploy capital controls without being subject to investor lawsuits, as part of a broader menu of policy options to prevent and mitigate financial crises.

The TPPA is the Trans-Pacific Partnership Arrangement.

The “currency wars” are picking up and spreading aren’t they? Here we see economist asking for individual governments to be in effect allowed to follow an “I’m alright Jack type policy” and I am reminded that not all currencies can fall! However we also need to remind ourselves that the opening salvo in this war was fired by western nations such as the UK and US who have pursued very expansionary monetary policies which put downward pressure on their exchange rates.

As to the letter itself I am reminded of the fact that letters written by a large number of economists have a poor track record and in fact are more likely to be wrong than right if history is any guide to the future.

What has caused a change now?

The events described above have quite a few causes that have been developing for some time but it is hard to avoid the view that the recent monetary easing by the European Central Bank has contributed as well. it would appear that nearly all of the global power blocs wish to engage in what is in effect a race to the bottom. They may well get that wish but not in the way they intended….

As a final thought who exactly is going to have a strong currency going forwards? As I have pointed out many times the Swiss National Bank may get a dreadful surprise as to what “unlimited intervention” actually achieves and implies.

Just a thought

I spotted this in City AM today

Italians have just replaced Russians as the top foreign buyers of prime central London properties, ending years of oligarch dominance, according to Knight Frank.

If this is true and it continues it is a clear case of an amber light for Italy and yet another phase in the central London property bubble…….

In the scope of its Alliance Ground Surveillance (AGS) system, NATO will purchase five US-built Global Hawk drones from Northrop Grumman. The decision follows the exposure of major shortcomings in the Alliance’s air surveillance capabilities during the Libya campaign in 2011, where European allies had to use US drones. The costs for purchase and maintenance of the unmanned aerial vehicles will add up to 3 billion Euros ($3.9 bn) over 20 years. While the costs will be shared by 13 NATO member countries, the drones, to be stationed at the NATO base in Sigonella, Italy, will be available to all 28 allies. France and the United Kingdom will contribute to the AGS through their own air surveillance equipment. NATO Secretary General Anders Fogh Rasmussen welcomed the defence ministers’ decision as major example of pooling and sharing projects within the Alliance. According to a NATO official, the AGS will contribute to countering improvised explosive devices in Afghanistan and piracy off Somalia, as well as to humanitarian operations, disaster relief and monitoring arms embargos.

The question of how European allies can lower their reliance on US defence capabilities while dealing with budgetary constraints will be discussed in the Security Jam from 19 to 23 March 2012. Register here for this massive global online brainstorm.

The American public has been told that the Iraq War is a thing of the past. Even still, the US Department of Defense is asking the federal government for almost $3 billion for “activities” in a country that they shouldn’t be in.

The last US troops were supposedly withdrawn from Iraq just before 2012 began, but after years of a war that abruptly ended this past December, the Pentagon still wants billions to continue doing…something in Iraq. According to the latest budget request, the DoD think around $2.9 billion should cover the cost of “Post-Operation NEW DAWN (OND)/Iraq Activities.”

In a report published Monday by Wired.com, they acknowledge that the funding that the Pentagon wants now is almost as bizarre as the war itself. For nearly $3 billion, the DoD says that will be able to afford “Finalizing transition” from Iraq. Only two months earlier, however, President Obama celebrated the end of the Iraqi mission. At the time, some critics called the ending of the war as more of a catapult for Obama re-election campaign than anything else. Now with the revelation that the US Defense Department still wants billions for a war America is told it isn’t fighting, the alleged ending of Operation New Dawn seems just as questionable as its mysterious beginning.

After “ending” the war last year, the US government handed Iraqi operations over to the State Department. Three billion dollars — the amount that the DoD wants for a war they aren’t waging — makes up around one-ninth of the State Department’s entire annual budget. In 2012, the Pentagon had asked for $11 billion to fight the War in Iraq — which was, at the time, an actual war.

But as the death toll stands at over 4,000 US casualties after nearly eight years overseas, it is clear by the latest cash request that the US, as many had expected but had not hoped, is not ready to just walk away just yet.

On the bright side, it might be easier to foot the cost of this make-believe war than you would think. Suspiciously, the Special Inspector General for Iraq Reconstruction announced in January that upwards of $2 billion that the US was holding onto for Iraq had mysteriously disappeared.

European government’s combined debt figures are out today. How bad are they?

€10,320,106,100,000: that is the total amount owed by the 27 governments of the European Union. Published today on a quarterly basis for the first time, the figures show a big increase across the contitnent – up from 60.3% of GDP in Q3 2008 to a whopping 82.2% now.

Of that debt, €8.2tn is owed by governments in the eurozone – which is marginally down in the last quarter but still represents 87.4% of those countries’ combined GDP. And is up from 67.7% in 2008.

The key data here is from Eurostat – the first time this has been published quarterly

The overall figures show how big rises in debt at the start of the crisis have slowed, with countries such as the UK, France and Germany, bunching around the same place. It also shows Greece’s debt shooting up. Italy has remained surprisingly consistent over the whole period, as Berlusconi allowed his country’s debt to grow in line with its GDP.

How does the EU spend its budget – and who contributes the most? Scroll down to explore the graphic
[see link]

EU budget: what does the European Union spend and where does the money come from? Download the graphic as a PDF

Where does the European Union get its money from‚ and how does it spend it?

With an annual budget of over €122bn, the EU is an economic power in its own right, more significant than many countries. So, how do those finances break down? This latest detailed data – from 2010 – shows where the hard cash goes – and where it flows from. As part of our Europa series, we wanted to look at how the figures break down.

Extracted from the EU budget site, we’ve gone for the most detailed recent numbers.

The CleanIT Project
The Clean IT project is carried out with the financial support from the Prevention of and Fight against Crime Programme of the European Union, European Commission – Directorate-General Justice, Freedom and Security.

Over the last few months – as Peru helped guide the United Nations climate negotiations – five separate oil spills along a main oil pipeline through the Amazon have spewed thick black clots of crude across jungle and swamp and carpeted local fishing lagoons with dead fish.

Earlier this month, the world's eyes were on Lima as 196 nations debated what to do about climate change at the UN COP20 climate summit. While world leaders debated, negotiated, signed and didn't sign agreements, Amazon Watch and our allies sounded the alarm on the critical importance of the Amazon rainforest and indigenous ancestral territories in […]

This month's hearing before Canada's Supreme Court was Chevron's last appeal to try to stop a full enforcement trial. Chevron audaciously asked the court to ignore all precedent, and to change the law just for them.